Some of the "bubble" stocks investors are buying today are making the dot com bubble of 2000 look like child's play in comparison. Here is a brief description of why the Miami house flippers from 2007 and the tech investors from 1999 swear by these investment ideas, a brief synopsis of their valuations and growth prospects, and why you have to be freebasing something to buy these names with your hard earned money in my view.
While I cannot in good faith recommend investors go short these names just yet (even though I'm shorting some of them), I will say that our overall markets resemble a Band-Aid covered knife wound -- once QE2 is withdrawn the Band Aid could be ripped off and not just slowly peeled back ... I would expect that markets could crash some 10% in a single day as they did last year once the FED stopped buying bonds and stimulating the economy. That said, the business of predicting market direction is not my strongest suit as I spend most of my time looking at business quality and valuation.
The overall investment environment is currently incredibly rewarding to those who are completely uninterested in studying businesses and their intrinsic values. Most traders would be better off buying Chipotle and watching the Casey Anthony trial than actually doing any kind of work here. The passing of the "Butter Cow Lady" is somehow much more newsworthy than Greek Austerity or the 3 Nuclear reactors that are currently at risk here in the United States.
What matters is the short term QE put option, the trend of the leading stocks, and the fact that there are greater fools out there buying up bubble names. This strategy is fine as long as there is someone to buy these stocks from you at a higher price and as long as George and Casey Anthony make headlines over the structural problems that exist in financial markets. Does the Casey Anthony obsession seem totally insane to anyone else? I digress -- I simply don't think that the momentum names can move higher once QE ends and I think that an economy based on the sand castles or gadgets and pricey burritos will soon wash away with the tide. While I may sound negative here, I am not -- Jesse Livermore made a fortune shorting stocks and I am very bullish on select undervalued equities.
Again, please don't rush out and short these names and blame me if you lose money. These stocks are in a speculative bubble (in my view and I could always be wrong) and timing the pop of any bubble is notoriously tough -- these stocks may run even further in the short term, but I doubt it now that the Bernanke Put is leaving the market. That said, shorting these stocks using tight stops or bear call spreads makes analytical sense if you are like me and think that stocks should trade for a reasonable estimate of intrinsic value. Quarter end window dressing involves selling underperfroming and undervalued stocks and buying stocks that "have gone up" in the very recent past. Now could be a good time to take the other side of this trade given that QE2 is gone and longs in these names are now speculating without a net.
(VHC) -- VirnetX exhibits little to zero sustainable earnings with one time gains making this stock appear cheap. I view this stock a strong sell but recognize that I could be wrong. VHC had revenues of around seventeen thousand dollars last quarter with a market cap well into the billions of dollars. I would take this time to sell, or sell short VHC with a tight stop loss given the Greek news and other "bullish" news has been strongly discounted.
(OPEN) -- Opentable has rallied a bit in recent trading, and has been bid up in a wave of speculative buying on one hand and short covering on the other. With a PE ratio of 128X earnings, we think these shares are still far too overvalued at current levels and we would not want to own this stock at half of the current price. We would be selling calls here, but recognize that the company could find new ways to monetize their popular website.
(GMCR) -- Green Mountain Coffee has rallied sharply over the past few years, but rising payables and inventory as well as a net tangible deficit make us very skeptical of the company's growth. I hate taking the other side of Cramer's speculative buys, but Sam Antar believes that Green Mountain has engaged in channel stuffing and aggressive revenue recognition. Although we are not forensic accountants, we do not like the trends in tangible book, inventory, or accounts receivables. Here is the link to Sam Antar's blog.
(SFSF) -- Successfactors has been sold off fairly sharply in recent sessions, but make no mistake, this dip does not make this a value stock. SFSF trades for over 250X forward earnings and has shown losses over the past few years on average. Yes, the company is growing revenues, but because profits and owner earnings are not growing at a commensurate rate we are quite bearish on the name over the longer term.
(PEET) -- Caffiene gives you a short high but leaves you drained in the longer term. We think the same can be said of the recent rally in Green Mountain and more draatically in the sympathy rally seen in shares of Peete's Coffee. We think the stock, which is trading for 40X earnings, is substantially overvalued given that growth is likely to remain well under 15% over the next few years.
(CRM) -- Salesforce.com is our favorite name to sell calls against in the overvalued cloud computing area of the stock market though we like VMWare (VMW) over $100 as a long for a pairs trade in the space. We prefer Cisco (CSCO) and Microsoft (MSFT) in the cloud space and if we have to reach for growth we would choose an Ebix (EBIX) or a BSQUARE (BSQR) for a 4G name as well as an F5 Networks (FFIV). Certainly, we believe that technology is vital to the recovery, but we also think that stocks trading for these kind of lofty multiples tend to cap any type of benefits that innovation creates as far as owning stock shares is concerned.
(SINA) -- SINA is back over $100 and while we respect this rally which has seen a 30% gain from the lows the stock looks pricey. The stock is earnings negative so I would not be bullish on the name here with a price to forward earnings of 55X and an EV/EBITDA of 55 because many Chinese names are trading for 5X earnings and literally cannot catch a bid. I am not saying all Chinese stocks are alike, but I don't think this stock is worth the risk, though I would not short it.
(LNKD) -- LinkedIn is said to have over one hundred million "users" though the company likely only receives one visit per month from the majority of their members. How this 12 visits per year is worth 7 Billion is beyond me -- 1 Billion is a fair for a clicks and eyeballs only valuation by 7 billion seems like a 1999 multiple to web visits (does anybody else remember when stocks were valued solely on web visits?). I would consider selling calls here, and am short some of the longer dated calls on the stock. That said, this is clearly a volatile name and could go either way. With a 1000 PE, this stock certainly makes some of the dot com stocks look cheap in comparison in my view, but I may be missing something and I do like the business ... According to Boolean Black Belt, 66% of LinkedIn users visit the site only once a month -- here is the link for the site usage stats mentioned.
All in all, now may not be the time to short these names, but I certainly wouldn't be buying any of these either.